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Jan 14, 2008

Performance summary

Cost pressure due to higher depreciation and finance charges result in 21.8% contraction in net margins during 3QFY08.

For the nine months period, topline growth was in line with the 3QFY08 (43% YoY), while higher other income provided some cushion to declining net margins.

Financial performance snapshot

(Rs m)

3QFY07

3QFY08

Change

9mFY07

9mFY08

Change

Net sales

3,654

5,236

43.3%

9,897

14,158

43.1%

Expenditure

2,052

2,983

45.3%

5,494

8,070

46.9%

Operating profit (EBITDA)

1,601

2,253

40.7%

4,403

6,088

38.3%

EBITDA margin

43.8%

43.0%

44.5%

43.0%

Other income

47

170

260.4%

120

587

388.6%

Interest

7

127

1850.0%

87

251

187.4%

Depreciation

263

1,875

613.0%

789

2,921

270.2%

Profit before tax/(loss)

1,379

420

-69.5%

3,647

3,503

-3.9%

Tax

338

70

-79.2%

848

921

8.6%

Profit after tax/(loss)

1,041

350

-66.4%

2,799

2,582

-7.7%

Net margin

28.5%

6.7%

28.3%

18.2%

No of shares (m)

35

35

Diluted EPS (Rs)*

81.0

P/E (times)

16.4

*trailing twelve month earnings

What has driven performance in 3QFY08?

Shree Cement exceeded industry growth to report 23% YoY growth in sales volumes. Such a robust volume growth coupled with better realisations (over 16% YoY growth) resulted in 43% YoY growth in topline. The industry clocked around 10% YoY growth during the first nine months of FY08 and northern region where Shree cement is a major player reported almost 11% YoY growth. In line with the growth in 3QFY008, topline grew by 43% YoY for the period ended 9mFY08.

Cost break-up

( % of net sales)

3QFY07

3QFY08

9mFY07

9mFY08

Increase / Decrease in stock

-0.4%

-0.7%

0.4%

-1.6%

Raw material consumed

12.3%

9.8%

11.8%

10.9%

Purchase of traded goods

0.5%

0.3%

0.5%

0.3%

Staff costs

3.8%

3.9%

3.7%

3.7%

Power & Fuel

16.9%

17.0%

16.4%

18.4%

Transportation & handling

14.0%

17.2%

13.5%

15.7%

Other expenditure

9.1%

9.5%

9.2%

9.6%

Though operating profits reported 40% YoY growth in 3QFY08, risng costs, which grew at a faster rate compared to topline growth, continue to exert pressure on EBITDA margins resulting into 0.8% contraction. Freight and power and fuel expenses have been exerting pressure on margins owing to hike in fuel prices. Though in recent quarters the company has been witnessing power cost pressure, going forward, it will be in a position to save power costs with the commissioning of the captive power plant.

During the quarter under review, the company has commissioned new grinding unit of 1.5 MTPA capacity. Sudden surge in depreciation charges, which reported 613% YoY growth, has been the fallout of this new capacity. The charges will get rationalised over a period of time as the capacity is put to optimum utilisation. The company has recently raised debt to fund its capital investment plans as it plans to increase its total capacity to 9 MT by the end of FY09.

However, during the 3QFY08, the 7-fold growth in depreciation charges and sky rocketed finance charges have pressed net margins to report 66% YoY decline. The 260% YoY growth in other income has helped restrict the downfall in net margins, which other wise would have reported almost 24% contraction in net margins instead of 22%.

What to expect?

The company has outlined capital expenditure in order to maintain market share and is foraying into southern markets as a move to derisk revenues. The company has the option to sale CERs by July 2010, and hence such income will keep accruing periodically till FY11 giving a boost to net margins.

We are positive on the sector growth owing to infrastructural activity taking place to support and sustain the current economic growth, however, what is concerning us is the fact that current high realisations will not sustain once the capacities start flowing in starting 2008. With huge capex plans already under various phases of implementation, the industry may see some supply glut from 2HFY09. With this, the all time high 30%+ EBITDA margins will get eroded impacting returns to share holders.
At the current price of Rs 1,324, the stock is trading at over US$ 100 based on our FY10 estimates, which is fairly valued considering the replacement cost.

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